Justin Kelly from Zurich’s Technical Services team explains why business insurance is important and the types of business insurance available for different business needs.
Small and medium sized (SME) businesses, traditionally the lifeblood of the Irish economy, have had a torrid time over the last 2 years. As the country reopens, once again SME businesses are to the fore with their entrepreneurial spirit helping to drive them along. While approaching these businesses solely on the topic of Business Insurance might seem premature, discussing it as part of an overall financial planning exercise should be essential. If the pandemic has taught us anything, it is the vulnerability to the actual future of a business following the death of a director, partner or key employee which can have serious financial consequences for those continuing to run the business.
I’m regularly asked about the different types of Business Insurance, so I’ve summarised here so as to give you a brief overview. At Zurich, we have a wealth of information relating to each of the different types, so if you’d like to learn more, just get in touch with the Technical Services Team or visit our website.
As you’ll know, the aim of Business Insurance is to provide policies to protect against death or serious illness which are backed up by proper legal structures. There are four main areas, Partnership Insurance, CoDirectors Insurance, Corporate Co-Directors Insurance and Keyperson Insurance. Each area is outlined briefly below. The legal structure and taxation of these types of insurances can be complex so professional advice should be obtained.
On death of one individual within a Partnership, the share of the business attributable to that individual is payable to his/her personal representatives.
By having Partnership Insurance in place, the surviving partners receive a lump sum with which they may purchase that business share back from the deceased’s personal representatives.
The insurance can be set up in two ways, Own Life in Trust or Life of Another. Using the ‘Own Life in Trust’ approach, each partner effects a life assurance policy on his own life arranged under Trust. Under ‘Life of Another’ each partner takes out a policy on the other partner’s lives.
On the death of one of the partners the policy proceeds are used to buy out the deceased’s partner’s share of business from the next of kin. With both arrangements, a legal ‘buy/sell’ agreement between each partner should be completed. These agreements come into force on death of a partner, compelling the surviving partners to buy the business share back from the deceased’s personal representatives and vice versa.
The death of a director who has a significant shareholding in a company can mean the surviving directors now have a new shareholder and the personal representatives now have shares which they want to sell.
Co-directors Insurance places funds in the hands of the surviving directors enabling them to buy back the shares from the personal representatives. The set-up of the insurance is again either ‘Own Life in Trust’ or ‘Life of Another’ arrangements.
Again a legally binding buy/sell agreement facilitates the buying and selling of the shares at market value.
Corporate Co-Director Insurance
In this arrangement the company effects the policies on the lives of the directors, i.e. a Life of Another arrangement, to alleviate the same financial problems as Co-Director’s Insurance, buying the shares of the deceased rather than the directors.
A legally binding contingent purchase contract, similar to a Double Option Agreement, will be required to facilitate the buying and selling of the shares at market value.
A Keyperson can be defined as an employee whose expertise is key to the continued financial success of the company. Keyperson Insurance is designed to compensate a company for any anticipated financial loss incurred if a Keyperson dies or is diagnosed with a serious illness.
Keyperson Insurance is set up on a Life of Another basis and must be agreed by special resolution by the company’s board.
In conclusion, for small firms, medium sized companies and partnerships Business Insurance will alleviate any financial consequences of death or disability and ensure the continued success of their enterprises.
Terms, conditions and underwriting criteria may apply.